Abuse of dominance in a developing country: reflections on the South African experience

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Abuse of dominance in a developing country
reflections on the South African experience

• Simon Roberts
• 3 September 2009

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Main issues

• Standards for evaluating abuse and how their
  application relates to aspects of the economy in
  question
• Economy of South Africa size, structure, level
  of development, proximity to other industrial
  markets, legacy of state support regulation
• The South African experience over the past
  decade an importance case study of abuse
  enforcement
• The standards and theories of harm, and dangers
  of under or over-enforcement
• The realities of competition enforcement
• Importance of abuse enforcement and encouraging
  effective competitive rivalry

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SA economy and competition concerns

• Where is South Africa relative to Vickers
  position in mid-Atlantic?
• there should be transatlantic differences in
  policies towards abuse of dominance. The European
  economy has historically been more monopolised
  than that of the US, and its competitive
  self-righting mechanisms may be less robust.
  (Vickers, 2007)
• South Africa?
• Relatively small, skewed industrial economy,
  highly concentrated
• Legacy of extensive government intervention,
  support and regulation
• Higher levels of effective competitive rivalry
  are crucial
• With returns that reward effort and
  entrepreneurship rather than bequest of
  entrenched dominance
• Highlighted in research findings and government
  industrial policy

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Considering the application of abuse standards

• Post Chicago economic theory highlights ability
  and incentive to exclude
• Scope for strategic behaviour, enhanced by
  information asymmetries and uncertainty e.g.
  about governments support for incumbent
• Note in developing countries monopoly position
  is often not based on innovation industry
  development is more about catch-up rents earned
  from government support and first mover
  advantages
• Main game in town for an entrenched dominant
  firm? - to protect position and ability to earn
  returns from it
• May be eroded by commitment problems, entry,
  inferior alternatives etc
• Durability of dominance is important, and whether
  and why a firms dominant position is
  entrenched
• Exploitative and exclusionary abuse? They may go
  together

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Illustrations

• From Sasol-Engen merger hearing
• Sasol inland dominance in bulk supply of refined
  product (refining capacity and logistics
  constraints)
• Price-setting, for sales to other oil companies
  marketing arms, depended on ability of Sasol to
  counter the threat of by-pass by OOCs for
  achieving monopoly price
• ArcelorMittals pricing of flat steel
• Ring fence sales to customers with alternatives
  from those without
• Cartels revealing links with abuse, exclusion,
  and vice versa
• How does a cartel ensure entry barriers?
• Why does a dominant firm upstream encourage a
  cartel downstream?
• Example of fertilizer
• Successes in cartel enforcement and
  criminalisation likely to reduce explicit
  collusion increased focus required on abuse?

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Abuse enforcement in South Africa

• South Africas Act followed international best
  practice
• Objectives based on SA economic realities, along
  with economic efficiency and consumer welfare
• Abuse of dominance provisions explicitly set
  hurdles and (with some exceptions) are
  effects-based economic tests
• For example price discrimination explicitly adds
  provision that there must be equivalent
  transactions, and meeting competition defence
  predatory pricing must be below marginal or
  average variable cost
• Explicit pro-competitive, efficiency and
  technology defences
• Checks include independent Commission and
  Tribunal, special Competition Appeal Court
• Price discrimination and general prohibition on
  exclusion without penalty for first offence

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Abuse enforcement in practice

• Commission understandably relatively conservative
  in early years and important cases brought by
  complainant to Tribunal
• But, little increase in abuse referrals over time
• Very lengthy hearings (JTI-BATSA around 50 days)
• Economic effects-based approach confirmed in
  Tribunal hearings, and very large role for
  economic experts
• Dominance? in evaluations, effectively about
  substantial market power barriers to entry
• Cases referred/decided almost all involved firms
  whose position owed to prior state
  ownership/support
• basic chemicals, steel, airline, former co-ops
  (pack-houses, silos), cigarettes, fixed-line
  telecomms

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• Exploitative? Excessive pricing
• Tribunal Mittal decision remitted back by CAC
• Outstanding issues in degree of dominance, tests
  to be used, and remedies
• Differential pricing as part of test? difficulty
  to bring such under our discrimination standard
  puts them in excessive pricing basket
• Exclusionary standards?
• Many sections such as predation, price
  discrimination, essential facilities, tying
  bundling still to be properly tested
• Tribunal caution where companies seek to use Act
  for commercial disputes
• Evidence gaps affecting e.g. CACs Nationwide
  Poles decision
• Intent and effect?
• Effect direct harm to consumers and/or
  substantial foreclosure
• Pro-competitive possibility versus
  anti-competitive likelihood? (incentivisation of
  retailers/distributors?)

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Weighing-up?

• We still have a long way to go, with balance
  firmly on the side of under-enforcement
• Challenges in more effective prosecution of abuse
  cases in developing countries are very
  substantial
• But, impact of abuse enforcement equally crucial
  - decisions and strategies of large firms
  determine the countrys economic development
• Working for more competitive outcomes?
• Follow through on cartel cases to address entry
  and effective rivalry requires attention on
  related abuse, where vertically linked markets
• Remedies for abuse? Require better understanding
  of competition principles on the part of other
  bodies, and actions on their part these go
  beyond de-regulation (experience of markets in
  food)